How a funding squeeze is driving entrepreneurs to abandon startups or scale down ambitions

In 2015, some 140 startups folded up. A year later, over 200 shut shop, and this year more and more founders are discovering that starting a business is no walk in the park.Shelley Singh | ET Bureau | May 23, 2017, 10:34 IST

Siddharth Ahluwalia, 30, started babygogo.in, an information and e-commerce platform for young mothers, in March 2016. An MTech with specialisation in neural networks, artificial intelligence and image processing, Ahluwalia worked with Amdocs, an Israeli telecom software company, before starting his entrepreneurial journey with Addodoc Technologies, a software for pediatricians. But he quickly shut it down as he was unable to scale.

Then he started babygogo with Rs 15 lakh of Ahluwalia’s own money and Rs 2 crore in seed funding. Fourteen months down the line, he is unable to get an additional $2 million (roughly Rs 13 crore).

He has had to scale down his fund requirements by a fourth as potential investors have started asking tough questions on path to profitability and don’t want to give money to offer discounts. “The market has been tough. Investors are looking for operationally profitable companies,” says Ahluwalia.

CardBack, a payments recommendation engine, started in 2013 and backed by LetsVenture, is scaling down in India next month. The past 15 months have been tough for the startup that makes users decide the best way to make a payment. It was neither able to raise fresh funds nor get the business going.

CardBack is now shifting base to Singapore. “It’s not been a bed of roses,” says Nidhi Gurnani, founder of CardBack. Sniffer, a discovery platform that helps a user find say, which pub has the highest single female footfalls, is looking for its next round of funding but investors are being very choosy. The app is appealing, but how do you make money, they ask the founders?

Three-year-old home services startup Taskbob, unable to build scale or profitability, shut shop in January. GoZoomo figured out unit economics is not working out and closed even before it ran out of investor money, which was returned.

Another one, iManageMyHotel, a Kolkata headquartered hotel solutions provider, is tweaking the business model to stay afloat. It has fired its VP sales, the function now being done by the founder himself, says Saumyajit Guha, principal, Jaarvis Accelerator. The startup, which is part of Jaarvis, has abandoned growth for positive unit economics.

In 2015, some 140 startups folded up. A year later, over 200 shut shop, and this year more and more founders are discovering that starting a business is no walk in the park. Of the 1,200 startups shortlisted by Nasscom in 2016, less than 15% got funded. “Trailblazing cash funding has evaporated. Investor expectations have shifted from revenue growth at any cost to a path to profitability.

So, entrepreneurs recognise that if an idea dosen’t work, shelf it,” says Sangeeta Gupta, senior vice president, Nasscom. Despite Paytm’s fund raise of $1.4 billion from SoftBank last week and an uptick in the company’s valuation to $7 billion, the startup scene remains stressed. Investors don’t want to give money to burn it on customer acquisition and are taking a hard look at business viability, sustainable revenues and profitable growth.

According to data from NewsCorp VCCircle, a venture industry analyst, investments from venture funds and angel investors plunged 49% during 2015-16. And the first four months of this year have followed a similar trend.

Priyanka Gill, founder of PopXO, a digital community for women, says “the bar has moved higher—investors have moved from growth to breakeven. Old fashioned fundamentals are back.” Adds Sanjay Nath, managing partner, Blume Ventures:

“Everybody got carried away. It was like giving a teenager five years of pocket money in one go. He didn’t know what to do.” Venture funding has hit a 22-month low of $125 million in the first four month of 2017. Many assumptions made about the India market on number of consumers, buying capacity and so on have got a reality check.

Niren Shah, managing director at Norwest Venture Partners, says: “There’s a realisation that a real market is not there yet. India is at least seven years behind China; earlier it was assumed India is two years behind its Asian neighbour. It’s been a bad dream for many investors and entrepreneurs.”

It hasn’t helped that some big names are up for sale - Snapdeal, and FreeCharge, to name two. SoftBank has blown up $1.4 billion in just two startups it backed, Ola and Snapdeal. Alok Goel, managing director, SAIF Partners says: “Ticket sizes have become smaller and the time gap between two rounds of funding has increased.”

Blume averaged 1.5 startup investments per month and now does two in three months. It recently raised $60 million for its India fund, up from $20 million earlier. SAIF’s latest fund has $350-400 million. But investors are unwilling to open purse strings just seeing PPTs or even the quality of teams. What looks good on paper may not translate into a viable business.

Accidental Entrepreneurs K Ganesh, partner, GrowthStory, says: “People were drawing apps and plans to impress the Koramangla IT crowd.” He’s referring to the Bangalore hub where engineers proudly show off new app ideas. “It’s a tough lesson for them as they look beyond and see whether what they have created is really relevant for the next 200 million Indians. It’s the end of the road for the accidental entrepreneur,” adds Ganesh.

GrowthStory, an entrepreneurship platform founded by K Ganesh & Meena Ganesh, has promoted more than a dozen startups. Buoyed by the government’s Startup India campaign and early successes with eyepopping valuations of home grown startups like Flipkart and Ola, thousands were prompted to take a shot at entrepreneurship right out of college.

Rahul Singhal, founder Applop, says: “College students came with Twitter followers and Facebook likes as evidence that their ideas have sufficient traction, in the hope of getting funding. It worked earlier, but no longer.” Applop, started in 2015, helps its 7,000 customers globally make and maintain apps. Initially it got seed capital from Green House Venture.

Since then it has raised three rounds, the last in February this year. “Scrutiny has increased. Investors take inputs from customers as well,” says Singhal. “Gone are the days when investors will give money so that you can give customers discounts. They want positive unit economics,” says Guha of Jaarvis. The accelerator, started in 2015, has a dozen startups in financial technologies, artificial intelligence, deep learning, machine learning.

Citing an example of a startup that has had to reduce cash burn Guha says: “iManage-MyHotel’s revenue is down from Rs 7 lakh a month to Rs 3 lakh, as it moved away from growth at any cost and is instead looking at positive unit economics. Startups need organic growth rather than viral growth.” Shah of Norwest ventures adds: “Often investors are not supporting their own investments in subsequent rounds (for Series C, D funding). Neither are they investing in new companies without deep evaluation.”

Ecosystem Matures

Ticket sizes and valuations are back to 2014 levels. Even Snapdeal is reportedly being bought by Flipkart for a $750 million to $1 billion, a tenth of the valuation it commanded not so long back. Ganesh points out that if in 2015 Series A ticket size (amount invested) was $5 million to $10 million and Series B was between $20 and $40 million, it’s about half of that now.

Apruv Agarwal, cofounder of SquadRun, a mobile marketplace for crowdsourced work, raised $2.1 million from Blume Venture and others in its second round funding. “Investors have started asking tougher questions. We were asked about comparable models in US, China and how they grew. Now investors even question why a model that worked in the US, China will work in India.”

Nath of Blume Ventures believes the clearout was much needed. “Even Silicon Valley has gone through boom and bust cycles several times. It’s good to clean up the ecosystem.”

Adds Prukalpa Sankar, cofounder of SocialCops, “B2C companies burn venture money to acquire customers. There was a rush to get funding (it was easy too) and build a B2C startup, while most people overlooked opportunity in B2B space. It’s not that 'happening’ but at least models are more sustainable.”

SocialCops, a three-year old B2B startup, hasn’t raised any money apart from seed capital, as it was never into deep discounting. Money generated from sales is enough to sustain operations With GDP growth on track, smartphone penetration increasing, 4G adoption on upswing, investors are positive about India.

“Entrepreneurs have to keep in view what Bharat (and not just India) needs rather than figuring out new PPTs on how to convince investors on giving money. Capital is plenty, but not easy to come by, more so, if your model is all about cash burn. That shows ecosystem maturity,” says Ganesh.